Finance sector illuminates the road to Low Carbon Development in India

Speaking at a joint event hosted by the The Climate Group, the Indian Banking Association and WWF, Deputy Governor of the Reserve Bank of India, Subir Gokarn, said that sustainability was close to his heart and he believed that “financial inclusion & sustainability went hand-in-hand”. Quoting the example of global pension funds such as Calpers, that find a business model is more robust and capable of generating long-term returns if it follows sustainability practices, he said that it is “difficult to establish empirically, but a fair bit of evidence of long-term correlation exists”.

Gokarn went on to say that there was no inconsistency between good financial practices and sustainability, and that it was up to financial institutions, plus intermediaries, to recognize and incorporate this notion into the way in which they allocate their funds.

“A key message is that there may appear to be a trade-off of the kind that if a company promotes sustainability, it has to accept a discount in financial terms. That proposition is now being challenged by historical evidence & current occurrences. The ability of a banking system to combine effective risk mitigation, risk management, sector diversification with considerations of good practices in energy, environment, social and community relationship is widening. More and more companies are becoming conscious of good practices that they have to perform, not because of any altruistic notion but because it’s also good business”, he added.

During extensive discussions throughout the day, it emerged that while a global carbon market would drive significant change in investment, action need not wait, in spite of limited policy incentives. It was time for the finance sector to implement its own policies – for example, a levy on carbon intensive sectors that do not meet minimum standards that could be put into a low carbon fund.

Renewable energy is an exciting new field which was analyzed in detail. Vivek Mehra, MD, Sustainable Investment Bank, Yes Bank, noted that the Indian Government’s solar mission could provide an important framework for investment. “It’s really important that policies drive the development of a new, sustainable industry, and not just incentivise short term project development”, he said.

The discussion highlighted the need for smart policies in India that enable the market to evolve. Simply granting large subsidies for low carbon projects runs the risk of business models being built around these and is not attractive to investors looking for long-term financially stable businesses. It is also important that India does not create a false market by insisting on local supplies of solar panels (and other technologies) – sometimes foreign competition is healthy and can help ensure that India develops competitively priced, high quality products.

The other major thrust area in India’s battle against climate change is undoubtedly energy efficiency. Energy Service Companies (ESCOs) provide a huge opportunity for India to realise the potential of energy efficiency, but more needs to be done to strengthen the market through better approaches to verifying auditors, building capacity and credibility of ESCOs, and ensuring the financial products are available to support this. The Indian Government’s energy efficiency mission will be releasing their strategy in the next few weeks that will detail policy incentives.

The final session was devoted to sustainable lending guidelines for financial Institutions. During the discussion on the Equator Principles, it emerged that such global guidelines align with regulatory requirements in India. Many Indian banks have processes that look at sustainability issues before making investment decisions, even though they have not formally adopted the Equator Principles.